Axie Infinity — The biggest Ponzi Scheme in crypto right now?
Axie Infinity has been making headlines inside and outside the crypto world for the last few months. For those who have been living under a rock — it is a blockchain-powered online social game where players battle cute little monsters called Axies, earning a token called Smooth Love Potion (SLP), which can be sold for cash or used to breed more Axies, which can also be sold on. The game cleverly combines features of Pokemon, Cryptokitties, and even Decentraland (you can buy land).
The numbers look great. The market cap of its governance token mooned 10x in July alone, catapulting it into top 50, just a few spots behind MakerDAO, and giving it a fully diluted valuation of $11 billion. With 800k daily active users, its annualized revenue based on the last 30 days is 1.2 billion — the same as Candy Crush.
The developers definitely got something right when it comes to designing the gameplay and the image of its Axies, but the biggest contributing factor to its virality, by far, is its economics. Players are highly incentivized to keep playing Axie because, at the current rates, they can make up to $1.000 / month from playing it full-time. This is mostly appealing in developing countries like the Philippines, where this represents a good living wage. Currently over 40% of Axie players are based in this country.
Mainstream media have picked up this narrative, calling the concept play-to-earn, with the promise of creating millions of new jobs in ‘the metaverse’ and bringing economic empowerment to millions of often ‘unbanked’ people in the developing world, whose both labour markets and governments are often unable to provide them routes out of poverty. There are even people now that have built their entire businesses on top of Axie —breeding and lending their axies out to new players, wishing to enter. The largest such project (YGG) now has a token, which just reached a whopping $2 billion fully-diluted valuation.
Crypto influencers have been raving about Axie too and it has been featured on every reputable crypto podcast with, as far as I have seen, uncritically enthusiastic endorsement. I get it. This looks like one of the big breakthroughs the cryptoverse has been waiting for — a product with potentially mass appeal outside the current crypto community of coders, sophisticated trades, and speculators — promising to onboard a billion new people into crypto, through a fun interface. What is there not to love?
Let’s look under the hood
It is undeniably a great narrative with a lot of feel-good factor and shiny looking numbers, that every self-respecting VC would kill to invest in. With every great boom cycle narrative though, one has to be cautious and examine closely how this engine of growth is fuelled and how sustainable it is. Let’s look at the numbers, from a player’s point of view.
Currently it costs about $1.000 to buy 3 axies — a requirement in order to start to play. Sure, the game is fun but this is way out of line with what anyone pays for any kind of online game today. Cryptokitties start from $5, Fortnite charge you nothing in order to get as many people to start playing as possible, trying to upsell you on paid in-game items later. This is a very common model. CandyCrush’s monthly revenue per user is about $0.36; The much more sophisticated multi-platform game Fortnite is doing somewhat better at $1.42 per user per month, based on its monthly active user base of 350 million.
So — is Axie a 500x better experience than all the other games, meaning people will pay $1k upfront, just to enjoy it? Of course not. Especially not those players in the developing countries, where the vast majority are located. Players are joining and paying this much money solely because they see it as an income-generating opportunity. And for the moment, it is. The question to be asked though is — where is this money coming from?
How game economies work
For every product or service that has economic value — there need to be buyers and there need to be sellers. Sellers make money by putting in their resources (time, money, materials, etc) into creating or distributing the product, whilst buyers pay to purchase, license, or lease the product from the sellers. Net net, the sellers make money off the product, the buyers pay money to benefit from the product. The total amount of money paid by the buyers must equal the total earning of the sellers.
In case of Axie, as explained above, it currently seems that everybody is joining in hoping to be a seller — to make money from putting in their time playing, earning, and selling SLP and breeding axies. In other words, everybody is joining in hoping to walk away with more money than they put in. This is the reason they are paying the $1.000 price tag.
For now, this works, because the number of new players joining in each month is larger than the number of current players, meaning people can make their money back in less than 2 months. Using the terminology above, new joiners each month are net buyers, paying the profits of the earlier joiners. They become net sellers after about two months, when they have earned back their initial investment. And so it goes on. Notice the resemblance to a pyramid scheme yet?
The definition of a pyramid scheme is that each layer makes money as long as there are more layers coming in, at the right pace. Each pyramid scheme sounds great and looks indistinguishable from a legitimate high-growth business on the surface, as long as it lasts. But each pyramid scheme eventually reaches saturation, when new layers are unable to make a profit anymore by recruiting even more layers, which is when the whole scheme topples.
As things currently stand, this fate is inevitable for Axie. It is hard to predict when the collapse will happen, as crypto and meme stock bubbles have proven to be able to go on for longer than expected, but nevertheless, there are only so many daily players it can reach, unless all of world’s population drop what we are currently doing and start playing Axie full time, in about 13 months’ time. Seems unlikely to me, even though this would be one of the most ironic apocalyptic scenarios imaginable.
Just for comparison, the number of professional athletes in the US able to make a full-time living is currently about 11.800 — or about 0.0036% of population. The number of pro gamers is even lower, at about 8.000. In developing countries less able to support them, the fraction of population would be even lower. Luckily, even the creators of Axie understand this, and have made sustainability one of the key points in their ‘whitepaper’. I took the time to read it and found it grossly devoid of substance. Let me therefore sum up and categorize the options for you, in human speak.
The way forward
There are only two scenarios:
A.) If this game remains a self-contained zero-sum economy, the buyers must always be amongst the players themselves. That means there is an equal number of players for whom this turns out to be play-to-earn, and an equal number for whom this turns out to be pay-to-play. This will happen involuntarily, once the pyramid collapses and the players who have joined in the last two months become the payers.
In reality, the distribution will be worse — a small number of people will have made a substantial profit, and a much larger number of people will have made a loss, as they will have reinvested their earnings back into the game. This happens in most bubbles and it seems most likely to be the path forward for Axie, right now.
B.) The only hope for Axie is for it to stop becoming a self-contained circular economy, and gain revenues from outside the game, subsidizing players with money coming from other people, who are not profit-seeking players themselves, but are parting with their money voluntarily, in order to pay for something inside the game, without expecting a profit.
This can be a free tier of players who join without having to buy axies and end up buying in-game items later on to enhance their experience, just like people do inside Fortnite. It can be a flock of companies coming in to advertise their products to the players, inside the game. It can be government or non-profit donations and grants aimed at onboarding the developing world into crypto. All these examples are taken from the Axie whitepaper, section ‘Long-term Sustainability’.
Once again though, let’s look at the numbers here. In order to keep the current earnings high enough to allow people to play-to-earn full time, the advertising revenue would need to be $1.000 / player / month. That’s still at least 1.000x realistic values. In order for a tier of non-earning players to subsidize the earning tier, the ratio of earners to non-earners would need to be at least 1:700, assuming the non-earners are willing to pay about $1.40/month on average, in line with Fortnite. Assuming non-profits will find the money and will to subsidize millions of people to play a crypto game full-time is just laughable.
Thus the game can indeed become sustainable, but only if the tier of money-making players shrinks to 1/700th of the total player pool, which would still be several times higher than the ratio of income-earning pro-gamers in any other online game. But perhaps possible, if most of the revenues go to players, rather than the company. This transition won’t look pretty and will mean a lot of people not getting their investment back and losing money. Don’t get me wrong, I would love to see millions of Filipinos find economic freedom through crypto but — as always — if something looks too good to be true, it usually is.
The thing about societal disruption is this — it is sustainable as long as it successfully channels resources (like computing power or human labour) into something that society values and rewards financially. Using electricity to secure a payments blockchain seamlessly settling billions dollars worth of transactions is a good example. Creating new types of online jobs like developers for blockchain projects or even VAs for companies in developed countries is another good example that works and is sustainable.
Channelling a vast amount of human labour into playing a game as a form of economic activity in itself is NOT sustainable, unless the value generated somehow translates into the real world outside the game, like it does in the examples above. Sure, perhaps one day the metaverse will be evolved enough to have a higher GDP than the ‘real world’ of today — but it surely won’t become the case in the next few months, which this game needs to achieve, in order to sustain itself.
Therefore — let’s keep exploring bold new models of work, play, and money, but let’s also always be cautious not to ape into bubbles and get burnt. If you read my other articles you will see I’m as pro-crypto as it gets, but even I have learnt the hard way the importance of telling apart hype from value, and investing time and money at the right time of a cycle. In my view — Axie is currently one of the most price inflated and conceptually over-hyped assets in crypto, and it is your choice to go with the crowd, or against it. I know what I will do.
If you enjoyed this review of Axie Infinity — is it a scam, a pyramid scheme, or a legit game — ➡️ find me on twitter 🐦. Feel free to also follow me here or clap, like this -
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